CAF-1 · Chapter 3

IAS 16 Property, Plant and Equipment MCQs with Answers

15 multiple-choice questions on IAS 16 Property, Plant and Equipment for CAF-1 Financial Accounting and Reporting. Try each one before revealing the answer and explanation.

1. Question 1

   Epsilon Ltd acquired a new machine by exchanging an older model with a supplier. The transaction lacks commercial substance. How should Epsilon measure the cost of the new machine at initial recognition?

   • A) At the fair value of the asset given up.
   • B) At the fair value of the asset received.
   • C) At the carrying amount of the asset given up.
   • D) At the original historical cost of the asset given up.
   Show answer & explanation

   Answer: C) At the carrying amount of the asset given up.

   If an exchange transaction lacks commercial substance, or if fair values cannot be reliably measured, the acquired asset is measured at the carrying amount of the asset given up.

2. Question 2

   Zeta Corp revalues its office building, resulting in an upward revaluation of Rs. 25 million. Previously, an impairment loss of Rs. 10 million had been recognized in profit or loss for this same building. How should the Rs. 25 million surplus be recorded?

   • A) The full Rs. 25 million is credited to Other Comprehensive Income (OCI).
   • B) Rs. 10 million is credited to profit or loss, and Rs. 15 million is credited to OCI.
   • C) The full Rs. 25 million is credited to profit or loss.
   • D) Rs. 10 million is credited to OCI, and Rs. 15 million is credited to retained earnings.
   Show answer & explanation

   Answer: B) Rs. 10 million is credited to profit or loss, and Rs. 15 million is credited to OCI.

   A revaluation increase is recognized in profit or loss to the extent that it reverses a revaluation decrease (or impairment) of the same asset previously recognized in profit or loss. The remaining balance goes to OCI and accumulates in equity as a revaluation surplus.

3. Question 3

   The management of Theta Ltd decides to change the depreciation method of its factory equipment from the straight-line method to the reducing balance method to better reflect the pattern of consumption. How should this accounting change be applied?

   • A) Retrospectively, as a change in accounting policy.
   • B) Prospectively, as a change in accounting estimate.
   • C) Retrospectively, as a correction of a prior period error.
   • D) Prospectively, by restating opening retained earnings.
   Show answer & explanation

   Answer: B) Prospectively, as a change in accounting estimate.

   A change in the depreciation method reflects a change in the estimated pattern of consumption of the future economic benefits embodied in the asset. Under IAS 8, this is accounted for prospectively as a change in an accounting estimate.

4. Question 4

   Which of the following assets is excluded from the scope of IAS 16?

   • A) A factory building used for production.
   • B) Administrative office equipment.
   • C) Inventory held for sale in the ordinary course of business.
   • D) Vehicles used to transport goods to customers.
   Show answer & explanation

   Answer: C) Inventory held for sale in the ordinary course of business.

   Inventories held for resale in the ordinary course of business are accounted for under IAS 2, not IAS 16.

5. Question 5

   When an item of property, plant, and equipment is initially recognized, how should it be measured?

   • A) At net realizable value.
   • B) At fair value less costs to sell.
   • C) At cost.
   • D) At present value of future cash flows.
   Show answer & explanation

   Answer: C) At cost.

   Items of property, plant, and equipment are initially measured and recorded at cost.

6. Question 6

   Which of the following costs is explicitly EXCLUDED from the cost of an item of PPE?

   • A) Cost of site preparation.
   • B) Initial delivery and handling costs.
   • C) Costs of conducting business in a new location, such as staff training.
   • D) Installation and assembly costs.
   Show answer & explanation

   Answer: C) Costs of conducting business in a new location, such as staff training.

   Costs of conducting business in a new location, including staff training, are not included in the cost of PPE and must be expensed.

7. Question 7

   If an entity acquires a new asset in exchange for an old asset, and the transaction has commercial substance, how is the new asset measured?

   • A) At the original historical cost of the old asset.
   • B) At the fair value of the asset given up, unless the fair value of the asset received is more clearly evident.
   • C) At a nominal value of zero.
   • D) At the net book value of the asset given up.
   Show answer & explanation

   Answer: B) At the fair value of the asset given up, unless the fair value of the asset received is more clearly evident.

   If an exchange has commercial substance, the new asset is measured at the fair value of the asset given up unless the fair value of the asset received is more clearly evident.

8. Question 8

   How should an entity account for a major inspection or overhaul of an item of PPE?

   • A) Expense it immediately as routine maintenance.
   • B) Capitalize it and derecognize any remaining carrying amount of the previous inspection.
   • C) Deduct it from retained earnings.
   • D) Record it as a separate intangible asset.
   Show answer & explanation

   Answer: B) Capitalize it and derecognize any remaining carrying amount of the previous inspection.

   Subsequent expenditure for a major inspection is capitalized if it meets recognition criteria, and the carrying amount of the previous inspection is derecognized.

9. Question 9

   Under the revaluation model, how frequently should revaluations be made?

   • A) Exactly every 5 years.
   • B) Only when the asset is sold.
   • C) With sufficient regularity so the carrying amount does not differ materially from fair value.
   • D) Annually for all assets regardless of volatility.
   Show answer & explanation

   Answer: C) With sufficient regularity so the carrying amount does not differ materially from fair value.

   Revaluations must be made with sufficient regularity to ensure the carrying amount does not differ materially from fair value at the end of the reporting period.

10. Question 10

    If an asset's carrying amount is decreased as a result of an initial revaluation, how is this decrease treated?

    • A) Recognized immediately in other comprehensive income.
    • B) Recognized immediately in profit or loss.
    • C) Deferred and amortized over 10 years.
    • D) Deducted from the share premium account.
    Show answer & explanation

    Answer: B) Recognized immediately in profit or loss.

    An initial revaluation decrease is recognized as a loss in the statement of profit or loss.

11. Question 11

    A change in the depreciation method applied to an asset is accounted for as:

    • A) A change in accounting policy.
    • B) A prior period error correction.
    • C) A change in an accounting estimate.
    • D) A capital reserve adjustment.
    Show answer & explanation

    Answer: C) A change in an accounting estimate.

    A change in the depreciation method reflects a shift in the expected pattern of consumption and is accounted for prospectively as a change in accounting estimate.

12. Question 12

    Under IAS 16, which of the following is NOT a required disclosure for each class of PPE?

    • A) The depreciation methods used.
    • B) The gross carrying amount and accumulated depreciation at the beginning and end of the period.
    • C) A list of all employees operating the machinery.
    • D) The useful lives or depreciation rates used.
    Show answer & explanation

    Answer: C) A list of all employees operating the machinery.

    IAS 16 requires disclosure of depreciation methods, useful lives, and carrying amounts, but not the identities of operating employees.

13. Question 13

    When an asset is disposed of, where is the gain or loss on derecognition reported?

    • A) In other comprehensive income.
    • B) Directly in retained earnings.
    • C) In profit or loss.
    • D) As a separate component of equity.
    Show answer & explanation

    Answer: C) In profit or loss.

    The gain or loss arising from the derecognition of an item of property, plant, and equipment is included in profit or loss.

14. Question 14

    Which of the following best describes the 'depreciable amount' of an asset?

    • A) The original cost of the asset minus its residual value.
    • B) The fair value of the asset.
    • C) The replacement cost of the asset.
    • D) The accumulated depreciation to date.
    Show answer & explanation

    Answer: A) The original cost of the asset minus its residual value.

    The depreciable amount is the cost of an asset, or other amount substituted for cost, less its residual value.

15. Question 15

    How often must an entity review the residual value and useful life of an asset?

    • A) Every five years.
    • B) Only when impairment indicators exist.
    • C) At least at each financial year-end.
    • D) Only upon disposal.
    Show answer & explanation

    Answer: C) At least at each financial year-end.

    IAS 16 requires the residual value and useful life of an asset to be reviewed at least at each financial year-end.